Scrambling for student loan rate fix

07/08/2013

POLITICO. JULY 7, 2013. Congress returns to Washington this week groping for a way to retroactively fix a high-profile doubling of some federal student loan rates.

The rate for new subsidized loans shot up from 3.4 percent to 6.8 percent on July 1 after divisions among Senate Democrats made finding a solution untenable. Now with the bright lights of the immigration bill off the upper chamber, student loan rates take center stage.

In the days since the missed deadline, Washington’s political apparatus has been a muddle of messaging. House Republicans are blasting Senate Democrats for not passing a bill as the lower chamber has done, albeit one that President Barack Obama has threatened to veto. And lawmakers from both parties are now using the #DontDoubleMyRate hashtag on Twitter, first popularized by Obama at the height of last year’s presidential campaign.

Senate leaders concede that the optics aren’t great. A Democratic leadership aide called the situation “awkward,” adding: “We need to get it resolved.”

One reason why Congress was able to leave the issue of skyrocketing rates for July is that it affects only new loans in the subsidized program, which make up about a quarter of the federal student loan program according to the Congressional Budget Office. Most students won’t sign off on those new loans for a few weeks, when the fall semester starts in colleges, which gives lawmakers some breathing room.

The White House says it trusts a solution is coming.

“We are confident they will get there and that the solution will include retroactive protection for students who borrow after July 1 so that their student loan rates don’t double,” said spokesman Matt Lehrich.

The Senate will quickly focus on getting the issue off its plate, especially since there is no clear legislative priority list yet post-immigration bill. Leaders are mulling putting forward bipartisan energy efficiency and pharmaceutical safety bills, a defense reauthorization or perhaps an appropriations bill.

How exactly that happens remains as “clear as mud,” as one aide put it. The Senate is angling for a vote on a proposal sponsored by 42 Democrats that would extend for a year the rate of 3.4 percent for those subsidized loans. Sen. Tom Harkin (D-Iowa) said he thought Republicans might sign on to another one-year extension after doing so last year.

But that 2012 fix for rate doubling was rolled into a massive package with a transportation bill and flood insurance. Republicans are almost unanimously opposed to a stand-alone short-term fix in the one-year extension because it contains “permanent tax increases” — the closure of a loophole for inherited retirement accounts.

A vote on the one-year fix is tentatively scheduled for Wednesday and expected to fail, although a deal could be struck before then. Harkin remains open to using a different revenue source for a one-year extension if Republicans can find another way to pay for it, an aide said.

As written, the one-year extension would also go nowhere in the House, said a spokeswoman for House Education and the Workforce Committee Chairman John Kline (R-Minn.). But she said he is “encouraged” by a plan closely in line with what Obama wants that has been pitched by a bipartisan group of six senators. The bill might be workable in both chambers if it is tweaked to assuage concerns of Democratic leadership.

The proposal from Sens. Joe Manchin (D-W.Va.), Tom Carper (D-Del.), Angus King (I-Maine), Lamar Alexander (R-Tenn.), Richard Burr (R-N.C.) and Tom Coburn (R-Okla.) would permanently reform all federal loan rates and take the nettlesome issue off Washington’s plate year after year. It would peg subsidized and unsubsidized loans to 10-year Treasury notes plus 1.85 percent, with higher percentages for graduate student loans. The interest rates would be locked in for the life of the loan, a key requirement of the president’s that was not met in the House bill.

The bill was pitched as the key to preventing doubling of the subsidized loan rates, but fell flat with Democratic leaders.

“They did a good job of making it seem like the solution,” one aide said.

The biggest issue is that the bill caps rates only on consolidated loans at 8.25 percent; Democratic leaders want a cap on individual rates as well. The legislation would also include $1 billion in deficit reduction, which some Democrats say is paid for by students in the form of higher-than-necessary rates.

A tweak to that bill in the form of a rate cap and deficit neutrality could forge a middle ground on an issue whose elusiveness has surprised everyone. Republicans posit that a fix would have been a cinch, even amid the immigration vote.

“They totally could have done it. This is five minutes, this is not a major piece of legislation,” a senior GOP aide said.

Student advocates are happy the issue has come to the political forefront but believe the debate in Washington is missing the bigger picture. The rise in subsidized rates will add only a few dollars a month to some students’ monthly payments. Lawmakers should be homing in on the debt students already have and how monthly payments on that debt are hurting graduates’ activity in the economy, said Paul Combe, president of American Student Assistance.

“If we have somebody who gets into income-based repayment after they leave school, the interest rate isn’t that big of a deal. It’s how they get that monthly payment,” Combe said.

Combe said if he had his druthers, he’d take a one-year extension of the 3.4 percent rates. As long as the issue is solved in a comprehensive fashion in Harkin’s Higher Education Act this fall, a temporary spike to 6.8 percent wouldn’t be that big a deal to most borrowers, he said.